Small cap stocks have broken down in a noteworthy way, as the down-move I anticipated roils the market. Typically, weakness in small cap stocks is an early warning of weakness in their larger cousins. First, a majority of stocks in the S&P 600 Small Cap Index have turned lower in all four of my trend following models (see Chart 1). Second, $SML, the Small Cap index has broken below its 200-day simple moving average (see Chart 2). Third, the broader Russell 2000 Index has also reached its 200-day simple moving average (see Chart 3). All three, taken together, point to significant weakness in the small cap area. Now, the question is whether the weakness will spread elsewhere.
Chart 1: All four of my trend-following models show a majority of stocks in the small cap index trending lower, which means the underlying small cap universe is turning lower. These calculations are supported by charts 2 and 3 below.